Credit-rating agencies could be more transparent in how they consider ESG factors but should not be required to use them, the European Securities and Markets Authority said in new technical advice.
ESMA Chair Steven Maijoor said in a statement that market regulation needs to reflect the "reality' of climate change by integrating sustainability considerations. "As demand for sustainability assessments increases, so does the need for vigilance on the levels of investor protection," he said.
ESMA found that credit-rating agencies are considering ESG factors, but the methodologies and degree of consideration varies. Given the role that credit ratings play in the EU regulatory framework, "it would be inadvisable" to explicitly mandate the consideration of sustainability characteristics in all rating assessments, ESMA said, recommending instead that the European Commission assess whether there are sufficient regulatory safeguards for products that could offer pure sustainability assessments.
ESMA also issued final guidelines on credit-rating disclosures. The new ESG disclosure guidelines for credit-rating agencies require more transparency around whether ESG factors were a key driver of the credit-rating action.